Genuine Tax Reform or Pipe Dream?

Jul 4, 2013

In June, Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) sent a letter to their colleagues, informing them of their goal to push for tax reform in this Congress. Of specific note was their goal to start with “a blank slate,” and force their fellow Senators to convince them of the value of each loophole they want back in.

At first glance, this effort seems like a top-notch push for legitimate tax reform. And so it should be – it is important to get this right because the current convoluted tax code discourages work and creates perverse incentives that damage the economy. At the risk of being overly pessimistic, this effort looks like it may fall short of what the country needs. As such, it should be watched very closely to make sure it does not turn into another false Beltway promise, even if a reform effort is ostensibly successful.

Five things in particular stand out:

First, the Senators write that the 1986 tax reform effort “is considered by many as the gold standard for tax reform.” While this may be true among certain segments of society, this engagement of the fallacious “appeal to authority” ignores that the real “gold standard” of reform is that which prevents the return of immoral and economically inefficient loopholes. Two popular methods of this kind of reform is a constitutional flat tax or a national consumption tax that eliminates the income tax.

While the 1986 reform effort was successful, and grew America’s economy tremendously, it still left open the 15,000 changes to the tax code the Senators’ letter mentions have been added since that time. Perhaps it should be called the bronze standard for tax reform.

Second, the letter admits the Senators have no intention of actually preventing the inclusion of loopholes in their final legislation. Consider: “we both believe that some existing tax expenditures should be preserved in some form. But the tax code is also littered with preferences for special interests.”

These two sentences have two major issues in them. First, it shows the “blank slate” is a starting point was never meant as anything other than a public relations selling point, not a legitimate effort to keep rates as low as possible. Second, all “expenditures” are “preferences for special interests.” Whether done to benefit charities, Americans who want to purchase a home, retirees, or NASCAR and Hollywood, they are all inserted for the sake of special interests or social engineering.

Next, the letter says the Senators are aiming for “the current level of progressivity” to be “maintained.” In other words, they support the lie that wealthy people should pay a higher rate of taxes simply because they make more. They ignore that in 2009 the top 1% made 50 times as much as the bottom 20% of earners, on average – but paid 1,500 times as much in taxes. And lower-income earners basically get a free ride when it comes to paying for national defense, federal education spending, and other areas of the federal budget paid for by individual income taxes.

Fourth, the letter says “all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.” Point 3 is just more proof Senators Baucus and Hatch are fully supportive of social engineering in the tax code – the only two goals of the federal tax code should be to provide the federal government income to accomplish its legitimate, constitutional duties, and do so in a way that maximizes individual freedom and economic prosperity for the American people.

Finally, the Senators say they “will give special attention to proposals that are bipartisan.” This is mostly a necessary concession to the realities of split party control of Washington, and the fact that the Senators are in different parties. However, it does indicate how much political considerations will play into any final legislation that makes it through the Finance Committee.

Given all of the above concerns, is the Baucus/Hatch proposal a failure before it even really begins? Ed Morrissey at Hot Air thinks so:

The effort from Hatch and Baucus is well-intentioned, but doomed to failure. Future Congresses will lard up the tax code almost as soon as it’s simplified by this process because it’s the best tool they have to interfere in the lives of citizens. Unless we take that tool away, this will be another historical footnote.

While Ed’s point is a solid assessment of the realities of Congress – and why the “gold standard” claim by Senators Baucus and Hatch is inaccurate – I think his conclusion is overly pessimistic. By his argument, no spending cuts should take place unless a constitutional amendment has been passed into law to prevent spending from going up again. Again, while these circumstances would be ideal for the country, the good should not be sacrificed for a great option that will never come.

Tax reform is necessary for the economic success of America and her people. The Baucus/Hatch effort should be watched closely to make sure it helps the American people and does not become just another Beltway power play disguised as reform.